Uncertainties may restrict runaway rally in market: Gubbi

There is a certain amount of uncertainty yet on the near term implications of the US elections and demonetisation move by the Indian government and that might deter any runaway rally in the markets says Pramod Gubbi, Director Institutional Sales at Ambit.

Although Indian fundamentals are better than other emerging markets, he feels demonetisation could suppress domestic demand and defer revival of corporate earnings. Several sectors exposed to strong consumption and demand drivers might take a hit, he says. 

"Given that we (India) are still classified as risk assets, in the event of bond yields expanding, we might see some amount of pullback,” he says. But, demonetisation has taken India several notches higher in terms of its attractiveness and that might help it attract relatively higher proportion of flows compared to other markets.

While he does believe it is time to raise cash levels, he prefers rotation of funds to complete withdrawal. Sectors like metals, global cyclical and pharmaceuticals can be looked at, he says. Of these, pharma could prove to be major beneficiary of fund rotation, he adds.Below is the verbatim transcript of Pramod Gubbi’s interview with Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: You have been exhibiting a bit of caution at higher levels in this market and we are seeing now this market find a bit of resistance around 8,600-8,700 level. Is that a top for the market, a ceiling for the market in the near-term you think?A: It is tough to say. There has been a double whammy of events which creates all the more uncertainty and speaking to investors you get a sense that people are still waiting for a lot more clarity. All we know is that speech of new president elect which has sort of given the confidence that not all the election rhetoric will translate into policy action. Beyond that, it is still wait and watch to see exactly what transpires from there. As far as the fiscal stimulus is concerned, I think that was always on the cards. We have been seeing the commodity space rallying even much before the election and given where monetary policy is pretty much stagnated in terms of its effectiveness; it was bound to happen irrespective of whoever won the election. You would expect some sort of fiscal stimulus in terms of infrastructure spend and America is not the only economy doing that, there could be other governments -- if you see the change in the finance minister in China which is also an indication of further fiscal stimulus there. We could also be hearing similar murmurs from the UK and Europe. So, that by itself cannot be a justification for this market to have reacted the way it did. Yes, a little bit of relief that all those protectionist talks may not come through, but we are still in limbo, we are still in uncertainty. I don’t think we are at a stage where we can say that we are close to the bottom. Latha: How should we react to this bond yield jump? The overwhelming theme across emerging market currencies, dollar strength and yield rise appears to be that fiscal deficit will rise, dollar will strengthen, fiscal deficit in the US will rise, and there will be inflation. What does it mean for an India investor, should we see some hedge funds knocking off more of the equity, should we worry for lower levels? A: Yes I think India perhaps may standout given it does still exhibit more stronger fundamentals characteristics as oppose to the emerging market basket as a whole. However, you are right, given that we are still classified as risk asset in the event of bond yields expanding, you might see some sort of pullback there. However, I  am hoping that the events of the last two days with the demonetisation, India goes up several notches in terms of its attractiveness and as a result from a long-term perspective, we would still be able to get significantly disproportionate amount of flows compared to other EMs. Anuj: Do you think it is time to raise cash levels, let this madness settle out and the market will give a better buying opportunity at some point?A: Absolutely. I think there is still a level of understanding that needs to go up in terms of the near-term implications, both in terms of the effects of the US elections as well as the demonetisation. One thing is clear that the demonetisation is clearly going to have a suppressive effect on the local economy in terms of demand and that is more fundamental as oppose to the US elections which perhaps at least in the near term could be more technical in nature in terms of driving flows whereas the local action clearly can have an impact on the local GDP and corporate earnings. So, that is where the action really is. Several of the sectors which were exposed to strong consumption, strong demand drivers, may need to take a significant hit both in terms of earnings as well as multiple de-rating. So, all you know is that you need to take money off from those sectors. Perhaps on back of the fiscal stimulus, the global fiscal stimulus you could look at metals and some of the global cyclicals, pharmaceutical is perhaps another sector so may not be a total withdrawal from the market, maybe a little bit of rotation is what is called for. Latha: What will you rotate towards, is there more juice left in pharmaceutical for instance and the banks?A: Banks, it is more of a long-term positive. Clearly the benefit of formalisation of the economy moving from black to white is a huge positive for the banking system in terms of being able to attract deposits and being able to play in a relatively stable inflation scenario. However, in the near-term you could see perhaps a stable scenario for them and not be an immediate impact in terms of the positive benefits. PSU banks on the other hand are more better placed because they are not that exposed to a demand destruction scenario. They were never really on that credit growth note so any fall in treasury yields will be positive from that perspective. They have had one of the best deposit franchises, so, as a result of money moving back into the banking system, they are relatively better beneficiaries. However, having said that, the older problems still remain. I don’t think they are going away anywhere in terms of NPA and asset quality but at the margins they are better beneficiaries of this move than private sector banks.As far as pharmaceutical is concerned, there is still some value in there. I would not think that we will go back to the levels that we saw like two to three years ago before the FDA actions. However, having said that, given the paucity of safe havens and given there will be a need for investors to move away from some of these sectors, pharmaceutical might attract disproportionate amount of that rotation and perhaps a good place to be. Sonia: What about metals, we have discussed the metal space has seen a significant appreciation until now and things have gone well, but do you think that there is still some more scope for investors to put in money into some of these larger cap names, Hindalco, Tata Steel’s of the world? A: Looks like; until a week ago perhaps we could have said that there is enough done but now with the events in the US and also the change in the Chinese finance minister who is clearly an indication of further fiscal stimulus coming in, we could expect that space to continue to be in the limelight. Given how much they fell from, from the precious cycle, I would expect there is still a lot more juice in there. Anuj: We have seen a lot by FII outflows and that didn’t stop even for the last two days when the market clearly has bounced back. Do you get a sense that we are in for more outflows from the foreign institutional investors (FIIs), just the domestic institutional investors (DIIs) have been buying but FII selling, do you get a sense with your feedback from clients that is going to pick up? A: There are two elements here. The outflows that we saw last month was perhaps driven by the need to be little cautious and take some money off the table ahead of the elections. However, I think there is a more nuanced transformation happening here given that we are moving away from monetary to fiscal stimulus. You might see the beginning of real economic cycle coming and at these stages asset allocators tend to get more exposure to active investors away from passive. So, I am hoping that a lot of the outflows, the initial outflows away from ETFs and passives and over time the active investors who are getting that money might start deploying and you might actually see those inflows come through over the next three to six months. Latha: Just for the moment, up until the end 2016, you expect that 8,200 is more likely than 8,900?A: I think so; given the level of uncertainty, it is unlikely to see any sort of a runaway rally. I would assume that that would be the case.